RBI Proposes New NBFC Classification Rules Based on Asset Size

The Reserve Bank of India (RBI) has proposed a major overhaul in the way large non-banking financial companies (NBFCs) are classified and regulated.

By shifting to an asset-size-based classification for upper-layer NBFCs, the central bank aims to simplify regulatory processes, enhance transparency, and strengthen oversight of systemically important entities.

While experts believe the immediate impact will be limited, the long-term implications could reshape the sector.

Shift to Asset-Based Classification

New Threshold for Upper-Layer NBFCs

Under the draft amendments to the Scale-Based Regulatory (SBR) framework, NBFCs with assets of ₹1 lakh crore and above will now be classified as upper-layer entities. This replaces the earlier model, which combined both quantitative and qualitative parameters to determine classification.

Simplification of Regulatory Framework

The move is seen as a step toward simplifying the regulatory architecture. A clearer, asset-based threshold reduces ambiguity and ensures that systemically significant NBFCs are identified more transparently.

Limited Immediate Impact on NBFC Operations

Existing Norms Already Account for Risks

According to Sanjay Doshi, the proposed changes are unlikely to significantly alter the operating environment in the short to medium term. This is because existing capital adequacy and exposure norms already factor in systemic risks faced by large NBFCs.

No Major Balance Sheet Disruptions

Doshi noted that the regulatory treatment of government-backed exposures remains largely unchanged, meaning that most large NBFCs will not see immediate balance sheet stress as a result of the new rules.

Tighter Norms for Upper-Layer Entities

Stricter Exposure Limits

The real impact of the new framework will be felt when NBFCs move into the upper layer, as highlighted by A M Karthik. He explained:

“When an entity moves from middle layer to upper layer, group-level tightening is likely,”

Under the revised norms:

• Group exposure limits will reduce to around 30% of Tier-1 capital, from about 50% earlier
• Single borrower exposure limits will also become more stringent

Minimal Immediate Stress Expected

Despite tighter norms, Karthik pointed out that most NBFCs are already operating within these limits. As a result, the transition is unlikely to cause immediate financial strain.

Inclusion of Government-Owned NBFCs

Ownership-Neutral Approach

A significant change in the draft framework is the inclusion of government-owned NBFCs in the upper layer. This aligns with RBI’s ownership-neutral regulatory philosophy, ensuring that all entities are treated equally regardless of ownership.

Targeted Exemptions Continue

Karthik noted that while such entities may qualify for upper-layer classification based on asset size, exemptions—particularly for government-backed exposures—have been extended.

Doshi added that although exposures backed by government guarantees may be excluded from certain concentration limits, capital requirements for such exposures will continue to apply. This ensures a balance between flexibility and prudential discipline.

Limited Scope for Avoiding Classification

Balance Sheet Strategies Unlikely to Work

Some NBFCs may attempt to remain below the ₹1 lakh crore threshold to avoid stricter regulations. However, Doshi dismissed this possibility, stating:

“Their ability to manage balance sheet size to avoid classification will not work in the mid to long term,”

Structural Constraints

He explained that strategies such as off-balance-sheet arrangements or splitting entities face regulatory scrutiny and practical limitations. Consequently, most firms are expected to prepare for eventual inclusion in the upper layer.

Impact on Large Groups and CICs

Core Investment Companies Under Focus

The proposed framework also brings large Core Investment Companies (CICs) into sharper regulatory focus. These entities, especially those crossing the asset threshold, may need to reassess their structure and regulatory positioning.

Potential Structural Changes

Doshi suggested that some CICs may reconsider operating as NBFCs, particularly if they do not raise public funds or pose systemic risks. This could lead to broader changes in how large conglomerates structure their financial operations.

Gradual Transition Process

No Abrupt Reclassification

Karthik emphasized that the transition to the upper layer will be gradual. Entities identified as upper-layer NBFCs will typically remain in that category for a defined period of up to five years.

RBI’s Proactive Engagement

The RBI also engages with companies nearing the threshold, allowing them time to prepare for stricter norms. Currently, there are no major unlisted NBFCs expected to move into the upper layer immediately under the proposed changes.

RBI’s Broader Regulatory Direction

Strengthening Financial Stability

The shift to an asset-based classification reflects RBI’s broader objective of tightening oversight of systemically important financial institutions. Over time, this approach is expected to:

• Strengthen risk management practices
• Reduce regulatory arbitrage
• Align large NBFCs with bank-like regulatory standards

Long-Term Sectoral Impact

While the short-term impact remains muted, the framework could significantly influence how large NBFCs manage growth, capital allocation, and risk exposure in the future.

Conclusion

The RBI’s proposed changes to NBFC classification mark an important step toward a more transparent and robust regulatory framework. While the immediate impact on the sector may be limited, the long-term implications are substantial. By introducing stricter norms for large entities and ensuring a level playing field across ownership structures, the central bank aims to strengthen financial stability and reduce systemic risks. As NBFCs adapt to these evolving regulations, the sector is likely to become more resilient, disciplined, and aligned with global best practices.